Based on the briefs they submitted Monday, the Securities and Exchange Commission and the Bank of America heard two different orders from Manhattan federal district court Judge Rakoff on August 10, when he told both sides to supply additional details on the preparation of BofA's proxy and disclosure materials for its September 2008 merger with Merrill Lynch. The SEC's 38-page brief included some of those specifics. Bank of America's 30-page filing focused instead on arguing BofA's innocence.
When Rakoff refused to approve the proposed $33 million settlement of SEC charges that BofA failed to inform shareholders that it had agreed to pay billions of dollars in bonuses to Merrill Lynch employees in advance of their merger, he said he wanted to know more about the role of outside counsel in the drafting of disclosure materials. The SEC brief, signed by associate regional director David Rosenfeld, essentially says that Wachtell, Lipton, Rosen & Katz (representing BofA), Shearman & Sterling (for Merrill) and BofA's in-house lawyers decided exactly what to put in and what to keep out of the merger agreement and proxy statement -- including the decision to disclose Merrill's bonus program in a non-public "disclosure schedule" that wasn't mentioned in the merger agreement or the proxy statement.
"The uncontroverted evidence," the SEC writes, "established that Bank of America relied extensively on counsel in connection with the disclosure materials at issue and that outside counsel was primarily responsible for drafting the materials and developing the form of presentation in the proxy statement."
Indeed, according to the SEC, Wachtell's Edward Herlihy was responsible for the merger to begin with. The government's brief says that last summer Merrill Lynch's then-CEO John Thain approached Kenneth Lewis at Herlihy's suggestion. After the principals agreed to merger terms on September 14 -- including, according to the SEC, BofA's agreement to authorize a Merrill bonus pool of several billion dollars -- Wachtell lawyers and their counterparts at Shearman & Sterling worked out the details of the merger agreement. (The S&S team was led by John Madden. We called both him and Herlihy for comment but neither returned our calls.)
"The negotiation and preparation of all of the relevant legal documents was handled by the law firms," the SEC asserts, based on its interviews with officials at BofA and Merrill. Both Thain and Lewis told the SEC, for instance, that their lawyers decided to disclose the bonus program in a "disclosure schedule" that was not part of the merger agreement. They and BofA in-house lawyers then prepared the proxy statement that went out to shareholders. The proxy materials included the merger agreement, but not the disclosure schedule outlining BofA's agreement to the bonus program. "The preparation of the joint proxy statement, including the decision not to attach the disclosure schedule setting forth the agreement on ... bonuses or otherwise disclose its contents in the proxy statement, was made by the lawyers at Wachtell, Shearman, Bank of America and Merrill," the SEC brief says, adding that statements in the proxy materials deliberately misled investors into believing Merrill bonuses would not be paid.
Bank of America did not waive attorney-client privilege for the SEC investigation, so the SEC says its knowledge of what the Wachtell and Shearman lawyers said is limited. The government contends, moreover, that the executives' reliance on their lawyers shields them from fraud accusations because it would be hard to prove scienter.
Bank of America's lawyers at Cleary Gottlieb Steen & Hamilton -- Lewis Liman and Shawn Chen -- offered precious few of the specifics Rakoff seemed to be asking for at the August 10 hearing. The names of Kenneth Lewis and John Thain, for instance, appear nowhere in BofA's submission. And as for the role of the outside lawyers, the brief merely says: "The parties were represented throughout the process by two law firms with pre-eminent experience in the field of mergers and acquisitions." Cleary offered no details on who or what those preeminent firms advised about disclosure materials.
Instead, the brief and accompanying affidavits from Dewey & LeBoeuf M&A group chairman Morton Pierce and Stanford Law School professor Joseph Grundfest argue that Bank of America didn't fail to disclose the Merrill bonuses at all.
"The intention of Merrill Lynch & Co., Inc., to pay incentive compensation for 2008 was disclosed and was part of the 'total mix' of information available to shareholders," the brief asserts. Merrill disclosed in SEC filings available to BofA shareholders that its planned 2008 employee compensation was roughly what it had paid in 2007, the brief says. Admittedly, Merrill did not distinguish between base pay and bonuses in those filings, but Cleary argues that was standard Wall Street procedure.
Moreover, the proxy agreement itself carved out specific exceptions to the covenant against Merrill paying bonuses, says BofA's brief. And according to the expert witness affidavit from Dewey's Pierce, shielding "competitively sensitive" information such as bonuses in a separate disclosure schedule that's not sent out with the proxy statement is typical. (Pierce, it should be noted, also disclosed in his affidavit that Dewey & LeBoeuf has taken in about $10 million in fees from BofA and Merrill since the beginning of 2007, and that he is being paid his hourly rate of $1090 for his work as an expert.)
Stanford's Grundfest details the many media reports predicting Merrill would pay billions in bonuses that preceded the shareholder vote on the merger, saying they were part of the mix of information available to Bank of America shareholders. "[BofA] has a powerful claim that it engaged in no misrepresentation or omission," concluded Grundfest (who is not charging the bank for his service as an expert). "[BofA] has a further powerful claim that any misrepresentation or omission, even if one was found to exist, was immaterial and hence not actionable." (The SEC counters that media reports of Merrill bonuses were "speculation," and that no media outlet said Bank of America had agreed to pay the bonuses.)
The SEC and BofA now have two weeks to respond to one another's briefs. Then Rakoff will weigh in, and we'll find out if the government and the bank have answered his piercing questions. We can't wait.
This article first appeared on The Am Law Litigation Daily blog on AmericanLawyer.com.